If you received compensation for a hire purchase (HP) car finance agreement, the tax on it works in exactly the same way as for PCP. The lender usually deducts 20% income tax from the interest part of your payout. If you’re a basic-rate taxpayer or a non-taxpayer, you can often reclaim some or all of it.
HP and compensation
With hire purchase, you pay a deposit and then monthly instalments until the car is paid off. Once the final payment is made, the car is yours.
The FCA’s car finance claims page explains that its compensation scheme covers hire purchase agreements, including PCP, taken out between 6 April 2007 and 1 November 2024. Leasing through Personal Contract Hire (PCH) isn’t covered. Our article on which PCP and HP agreements the FCA scheme covers has more detail.
If you’re not sure which type of agreement you had, our guide to PCP vs HP explains the difference. For tax, it doesn’t matter.
Why the tax is the same
The type of finance affects whether you were owed compensation and how much. It doesn’t change how the tax works once you’re paid.
Compensation is often made up of a sum that puts right your loss, plus interest to reflect the time you were without that money. The interest is taxable as savings income, whatever kind of agreement it relates to. The lender usually deducts 20% from it before paying you, without knowing your tax position.
How to spot the interest and tax on your letter
Your lender’s offer or settlement letter, or a separate tax statement, should break the payment down. Look for wording like:
- gross interest or interest before tax: the full interest figure
- tax deducted, income tax or tax withheld: the 20% taken off
- net interest or interest paid: what you received after tax
The tax figure should be one fifth of the gross interest. For example, gross interest of £500 with £100 tax deducted gives net interest of £400.
GOV.UK says that to claim back tax on interest, you need a document from the company that paid you showing the gross interest, the tax deducted and the net interest. If your letter only shows a single total, ask the lender for a breakdown or a certificate of tax deducted.
Keep the letter safe. It’s needed for any claim, and HMRC may ask to see it. Our checklist of documents you need for a car finance tax rebate covers the rest.
How much you might get back
As a general guide, using the tax deducted (T):
- Non-taxpayers can usually reclaim all of T. See our non-taxpayer guide.
- Basic-rate taxpayers can usually reclaim up to £200, because the first £1,000 of savings interest is covered by the Personal Savings Allowance.
- Higher-rate taxpayers can usually reclaim all of T if it’s £100 or less, and £200 minus T if it’s more. See our higher-rate guide.
- Additional-rate taxpayers usually can’t reclaim anything.
Other savings interest in the same year, such as bank interest, uses up the same allowance. HMRC works out the final figure from your full income, so individual results vary.
Getting the tax back
The repayment is usually claimed from HMRC on form R40, with a separate claim for each tax year. Claims can be made up to four years after the end of the tax year you were paid. If you’re registered for Self Assessment, it goes through your tax return instead. If you had more than one HP or PCP payout, read our guide to multiple payouts.
When you use our service, we check whether you’re likely to be owed anything, confirm the tax year, prepare and submit the R40 as your agent and deal with any HMRC queries. We pay you the balance after our fees. Our how it works page explains each step.
Next step
Find the gross interest and tax deducted on your lender’s letter, then use our eligibility calculator for a quick estimate.